Cheat Sheet: A quick guide to doing business in China

It has the second largest economy in the world, the largest population and the fastest-growing market of any country. Businesses would be foolish to ignore it. “Any company that wants to be global has to be in China,” says Newegg Inc. Chief Legal Officer Lee Cheng.

But it would also be foolish to head in unprepared. Our November cover story provides in-house counsel with the information they need to succeed in China, updating our 2006 China report with the many changes the country has undergone in the past six years.

This Cheat Sheet will provide you with a quick and dirty version of our cover story, condensing it into a five-minute crash course on doing business in China. For the full version, click here.

Business Basics

While it’s easier now to break into China’s market than it was 10 years ago, the government still plays a large role in controlling business within the country. Expect to have to seek government approval at just about every turn, and find a local lawyer to help you understand the country’s evolving regulations.

But don’t forget about U.S. regulations, either. Especially the Foreign Corrupt Practices Act. Personal relationships are very important in the Chinese business community—“as important as any written document or contract,” says Christian Na, deputy general counsel of Circor International Inc—and such ties can be easily abused or interpreted as bribery. Make sure to keep your relationships on the legitimate side of the law.

Changing Courts

China has a civil law system, meaning it isn’t bound by stare decisis, the rule that says lower courts must rely on judicial precedent. However, the country is trying to push for more uniform decision-making among its courts. The Supreme People’s Court of China has published several “guiding cases,” meant to show other courts examples of “sound judicial decision-making,” Hogan Lovells Partner Song Zhu says.

While these guiding cases have so far not been relevant to foreign businesses, the next batch is expected to include an intellectual property case. IP is an issue that foreign companies should keep their eye on when operating in China, as you’ll see on the next page.

Improving IP

China is trying to move away from its image as a manufacturing mecca, and promote indigenous innovation. It’s working, too. The country had the most patent applications in the world in 2011—1.63 million. Unfortunately, this indigenous innovation sometimes amounts to “tweaking” foreign technology, leaving some companies worried about protecting their IP in China.

The good news is that China recently closed a loophole in its law that used to allow applicants to receive Chinese patents on inventions that were already patented elsewhere in the world. Even so, King & Wood Mallesons Partner Alex Zhang recommends being quick to enforce IP rights, and employing a lawyer who can read and write Chinese to check contracts for any IP trickery from businesses whose practices have yet to catch up with the country’s laws.

Employment Environment

Experts told us that Chinese worker rights have been steadily improving over the past six years, perhaps thanks to the Labor Contract Law, which went into effect on Jan. 1, 2008. The law requires written contracts and overtime pay, among other provisions that drive up costs for employers, but Ricardo Ernst, a professor of global logistics at Georgetown University says it’s not all bad. Having contracts makes company policies more easily enforceable.

“Requiring contracts is a very good idea,” Ernst says. “The transparency of rules is, at the end of the day, what brings success.”

One thing employers don’t really have to worry about is unions. Despite media reports after an outbreak of labor strikes in 2010 that said the All-China Federation of Trade Unions was going to start advocating for workers more, Dan Harris, a partner at Harris & Moure and author of the firm’s China Law Blog, says that the unions really don’t have teeth.

“There’s no real union. It’s the government that’s telling them what to do and when,” Harris says. “This whole thing about [how] they’re going to advocate for the workers and all that? Bull.”